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pro-rata and backdoor roth?

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  • pro-rata and backdoor roth?

    I think I missed the boat on this pro-rata rule as it relates to backdoor Roth IRA conversions..

    I have $44,000 in a Traditional IRA (money rolled over from my 401a/403b in fellowship in 2016). I have $44,000 in a Roth IRA (don't think that is relevant in this scenario - but provided it anyway). I have been doing Backdoor Roth conversions for the last several years (this year included). I don't quite understand the pro-rata rule, but am I making a mistake in doing Backdoor Roths in this scenario?

  • #2
    Sorry, but you will need to amend your income tax returns for the last 3 years to pay taxes resulting from the pro-rata rule. Complete Form 8606 for each year and also check your state regs. That's as far back as the SOL runs, but you also may have a basis problem before that and I honestly don't have the time to research. This is definitely something you need to run by your CPA.

    Maybe @spiritrider will drop in.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Johanna pretty much has it covered. I might go back and review the Form 8606 for the years prior to the first amended return. Verify the non-deductible basis you did/did not carry into the first amended return.

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      • #4
        ouch. any idea roughly what this would cost? Does this mean I won't be able to do Roth IRA conversions going forward?

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        • #5




          ouch. any idea roughly what this would cost? Does this mean I won’t be able to do Roth IRA conversions going forward?
          Click to expand...


          You can always do Roth conversions. It's just that they will be part or all taxable. No idea of the cost. And look into whether you can roll your current pre-tax TIRA into your employer's 401k/403b to resolve the problem going forward (ask for a copy of the SPD if you don't have one).
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            The tax amount will be the amount you should have paid but for the incorrect IRA deduction in 2016. This will roughly be your marginal tax 2016 rate * the disallowed deduction, e.g. 28% * $5,500 = $1,540. The IRS interest rate for all of 2017 and 1st quarter 2018 = %. So if you file the 2016 amended return relatively soon the interest penalty will be < $1,540 * 4% = $61.60.

            While it is too late to recharacterize 2016. You should take advantage the fact that 2017 is the last year for Roth conversion recharacterizations. This will allow you to effectively undo the 2017 Roth conversion.

            Then if as suggested by Johanna, you can and do rollover all pre-tax IRA balances including the earnings into a 401k, 403b, etc... You can do a Roth conversion of the 2016, 2017 and even 2018 contribution if you want with little to no tax liability.

            You then will be freely be able to make Backdoor Roth conversions in the future. You just need to be careful in the future. With the tax reform, starting for tax years beginning 01/01/2018 no more Roth conversion recharactrizations are allowed.

            .

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            • #7
              Covered well above. Roll that traditional IRA over into an employer's 401(k), a solo (individual) 401(k) or something else that doesn't have the letters IRA in the title. The other option, which may not be a bad option given the new lower tax brackets, is to convert all $44,000 and pay the taxes on the conversion.

              Do one or the other, and the Backdoor will be wide open in the future. Unless, of course, new legislation closes it. But we should be good for awhile.

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